CBI Won’t Raise Interest Rates

EghtesadOnline: The Central Bank of Iran has no plan to increase deposit rates, the governor, Abdolnasser Hemmati, said in response to recent rumors about the likelihood of higher interest rates to help prop up the struggling economy, tame inflation and curb forex rates.

News ID: ۷۸۵۶۶۱

27 October 2020

"Raising deposit rates is unlikely to work in light of the low supply [in the currency market], banks’ unstable balance sheets and the government’s increasing demand for funds. Under the circumstances the central bank would do better to reduce the inflation rate by using other methods," he said in a note on his Instagram account.

Earlier in the month the CBI said interbank rates had increased steadily in recent months after dropping as low as 8% in June. Some experts say the CBI was expected to raise interest rates  to help lenders access cheaper financial resources and by extension curb inflation to the set target.

In May the central bank set the inflation target at ±22% for the fiscal year that ends in March 2021 --  a highly ambitious target seen by many as unfeasible unless the government finds an effective tool to control inflation expectations among the public.

Data published by the Statistical Center of Iran shows that the average goods and services Consumer Price Index in the 12-month period to Oct. 21  increased by 27.2% compared to the corresponding period last year.

This is while, the consumer inflation for the month under review (Sept. 22-Oct. 21) registered an increase of 41.4% compared with the similar month last year.

Steep rise in forex rates in the past several months has been a strong driving force behind high and rising inflation. The US dollar rate has almost doubled from the beginning of the current fiscal year in March, rising from around 160,000 rials to more than 300,000 rials.

Other Solutions

The CBI has pinned high hope on improving monetary policy and implementing open market operations to curb inflation.

The OMO and interest rate corridor (IRC) are the main components of the central bank’s new monetary policy announced in January. OMO is a financial instrument through which central banks buy and sell government bonds in the open market to expand or reduce money supply.

CBI has asked lenders to allocate a portion of their assets to buy bonds. “Given that in the new framework the CBI manages liquidity of banks and non-bank credit institutions based on Islamic bonds… they need to allocate a portion of their assets to [buy] bonds,” the CBI said.

Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.